Is Indonesia the Next Brazil?

CNBC.com

Monday, 13 Jun 2011 | 1:44 AM ETCNBC.com

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Indonesia’s low debt levels and strong growth potential has made the country a choice destination for investors, prompting financial firms like Deutsche Bank to compare the economy to Brazil’s in the 1990s.

Growing Interest in Indonesia

Tony Nash, Global Director, Custom Research at Economist Intelligence Unit says the next key step for Indonesia is institution building in light of growing interest in this emerging market.

"Indonesia's potential, if realized, could deliver Brazil-type returns for years to come," according to Deutsche's report released last week.

Indonesia has enjoyed an average growth rate of 5.7 percent between 2006 and 2010, and that figure is expected to stay around 6 percent this year. The growth trajectory has resembled that of Brazil's in the 1990s, Deutsche noted.

Already boasting among the lowest budget deficits in Southeast Asia, Indonesia is hoping to reduce it further in 2012 – to 1.4-1.6 percent of GDP from the current 2 percent – as it seeks to win approvals from rating agencies.

In February, Indonesia moved one step closer to an investment grade rating for the first time since the Asian financial crisis, when Fitch Ratings agency raised its outlook on the country's sovereign debt to positive from stable. Both Fitch and Moody’s ratings on Indonesia currently stand at just one notch below investment grade.

Apart from the low debt levels, Deutsche also lauded the country’s consumption power. With 232 million people, Indonesia is home to the world’s world's fourth largest population and the biggest in Southeast Asia.

"This is a population that wants to consume," said Tony Nash, Global Director of Custom Research at the Economist Intelligence Unit (EIU). He says consumption in the country has risen 4-and-a-half times in the last 10 years, with sales of cars rising 57 percent in 2010, and motorbikes up 26 percent.

And the consumption trend is likely to continue for awhile, according to Deutsche’s report.

"The absolute size of (its) working age population will continue rising for at least another 15 years," the bank observed, which will in turn improve Indonesia's productive and income generating capacity.

Since the Asian financial crisis in 1999, Indonesia has worked to restore macroeconomic stability. It has sufficient reserves cover; a low external debt exposure at 27 percent of GDP; and a public debt that is below 30 percent of GDP, among the lowest in the emerging markets.

Couple that with vast natural resource base it boasts, including iron ore and soybeans - it's perhaps easy to see why investors have been drawn to this market. Foreign direct investment was up over 30 percent last year, while the Indonesian equity market has been the best performing Asian market so far this year.

Deutsche cites the country's progress over the past decade in deepening roots with civil society and democratic institutions as a factor aiding investor sentiment.

But more needs to be done if it is to continue attracting investors.

"Inflexible labor markets are a big, big issue for foreign investors," EIU's Nash pointed out. Corruption, infrastructure bottlenecks and uncompetitive regulation are also issues that have continued to plague Indonesia.

"The key next step for Indonesia is institution building, and regulatory predictability," Nash concluded.